Could Turn Out Quite Well for IBM

Back in the summer, I gave you a heads-up in IBM (IBM) -- at the time, I was starting to stalk it on the buy side due to some weekly price support parameters. Now that the stock is testing and holding above this key support decision, I'd like to walk you through some thought processes on how to trade it. You may choose to use different information from what I present here, depending on what time frame you are trading -- but if you are looking at the bigger picture, where IBM may really have some value, you should focus on the weekly parameters.

To recap what I've been watching, the current setup on the weekly chart has everything to do with symmetry, or the similarity of some of the prior major declines in this stock. For IBM, these are only really visible on the weekly chart, and I have illustrated them below.

As of the Nov. 16 low, the most recent decline has amounted to $27.01 thus far. This is similar to three prior declines, which had brought the stock lower by $28.58, $28.50 and $28.84 -- which, projected from the October highs, have identified possible support for this stock. So far IBM is holding above that support level, and if it continues to do so, the upside potential will be rather healthy.

Now, so far I've only seen some very minor day-trading signals against this support -- nothing that suggests a more important low is in place just yet. So, at this point, let's focus on what we would need to see if the odds are to start rising for a continued rally from that level.

First, on the daily chart above, note that we are not looking at bullish technicals. The price is below both the 200-day and 50-day simple moving averages, and the five-bar exponential moving average is still below the 13-bar EMA. This tells us IBM is still vulnerable to a failure, even if we do start to see a rally from above the key weekly support. I would at least like to see the five-day EMA cross back above the 13-day in before I'll feel more comfortable placing a longer-term bet on the buy side.

You also want to be aware of key resistance on the way up on this daily chart -- at the $189.52 area, and then at $190.73 to $192.95. But does that mean we shouldn't now consider the buy side here?

To answer that, let's take a look at a similar setup in Monsanto (MON) from May. At that point, Monsanto had tested some major weekly support -- and, even though it looked negative on the daily chart at that time, we did eventually see a $22 rally from those May lows.

If you had used a 30-minute trigger -- with a crossover trigger in the eight- and 34-day EMAs -- it would have triggered an earlier entry than the daily chart would have done. However, the odds for a continued rally would have been lower here vs. what they would have been if the daily chart had confirmed a signal.

Now that we've looked at both a past example and at a current setup, let's fine-tune some parameters down to a 30-minute IBM chart.

If you are slightly more aggressive as a trader, you can start considering the buy side here if the $190.88 swing high is taken out, along with an upside crossover between the eight- and 34-day EMAs. Until then, I'm not willing take a long position in IBM overnight. However, I am willing to day trade it from the buy side.

Of course, if the key weekly support at the $181-to-$184 area is taken out, I will stop stalking the buy side here until further notice.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.